Down, Not Out: 5 Things to Know About China's Power Crunch

Blacked out homes, unlit streets, and factory shutdowns – China has been gripped by its worst power shortage in decades since mid-August, leading to electricity rationing in many provinces.

Power cuts have disrupted many households and industries in the country, from the manufacturing hubs of Guangdong, Zhejiang and Jiangsu, to the northeastern rust belt provinces of Liaoning, Jilin and Heilongjiang. Factory output growth in the world’s top energy consumer has dropped back to levels last seen in early 2020, when heavy COVID-19 curbs were in place.

Policy intervention from Beijing to address the coal shortage has managed to ease the power crunch since October, but the State Grid Corporation of China has warned that winter will still be a challenge and localised shortages are still a possibility.

It is not only China’s energy security under threat, but also economic growth, which has already been challenged by recent property sector woes and government regulatory crackdowns. The nation’s gross domestic product (GDP) grew at its slowest pace in a year in 3Q 2021, expanding 4.9% from a year earlier and missing market forecasts. This is down from 7.9% growth in 2Q and 18.3% in 1Q, suggesting the Chinese recovery is weakening.

In a more adverse scenario, we estimate that the power crunch could drag China’s 4Q growth down by about 0.6 percentage points from our current baseline to 3.4%. However, we think the actual impact is likely to be less severe.

Here are five things to know about China’s energy crisis.

1. “Campaign-style” carbon and energy intensity reduction is the key driver.

The power outages have come at the same time as Beijing has increased the pressure on regional governments to reduce their carbon emissions in line with the country's goal to be carbon-neutral by 2060. With the export-led post-COVID industrial boom causing power demand to surge, energy intensity (energy consumption per unit of GDP) only dropped 2% in 1H 20211, missing the government’s 3% target – thereby triggering this new wave of power rationing.